Chapter 6

Income Taxation – Capital Gains Taxation

_________________________________________________________________________________________________________________

I. CLASSIFICATION OF TAXPAYER’S PROPERTIES

1. Ordinary assets – assets used in business, such as:
a. Any assets held for sale, be it stocks, real property or other properties,
b. Any assets held for use, such as supplies, equipment, land, building, etc.
2. Capital assets – any asset other than ordinary assets, such as:
a. Personal (non-business) assets of individual taxpayers
b. Business assets of any taxpayers which are:
i. Financial assets – such as cash, receivables, prepayments and investments
ii. Intangible assets – such as patent, copyrights, trademark, franchise rights

Analysis of Properties Held by Taxpayers

INDVIDUAL TAXPAYERS

II. ASSET CLASSIFICATION RULES

 Classification ofPersonal
assets does
Assetsnot depend on the nature of the property
Business assets but upon the
nature of the(All are capitalbusiness
taxpayer’s assets) and its usage by the business
 General rule: the original classification of an asset will stand despite a change in use

III. TYPES OF GAINS ON DEALINGS IN PROPERTIES Ordinary assets Capital assets

1. Ordinary gain – gain on dealings of ordinary assets
2. Capital gain – gain on dealings of capital assets

Taxation of Gains on Dealings in Properties

Ordinary gains Regular income tax
Capital gains General rule: Regular income tax
Exception rule: Capital gains tax

Capital gains subject to capital gains tax

1. Capital gains on the sale of domestic stocks sold directly to buyer
2. Capital gains on the sale of real properties not used in business

IV. SCOPE OF CAPITAL GAINS TAXATION

Gain on dealings in capital assets Tax Rates
 Gain on dealings of domestic stocks directly to buyer 15% capital gains tax
 Dealings of real properties in the Philippines 6% capital gains tax
 Gains from other capital assets Regular income tax

V. CAPITAL GAIN ON DEALINGS OF DOMESTIC STOCKS DIRECTLY TO BUYER

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
This study source was downloaded by 100000819495833 from CourseHero.com on 09-30-2022 05:44:29 GMT -05:00

https://www.coursehero.com/file/92983222/Chapter-6-Capital-Gains-Taxationdocx/
Chapter 6
Income Taxation – Capital Gains Taxation
_________________________________________________________________________________________________________________
 Domestic stocks are evidence of ownership in a domestic corporation, such as:
1. Ordinary and preferred stocks
2. Stock rights, stock options and stock warrants

Modes of disposing domestic stocks

1. Through the Philippine Stock Exchange (PSE)
2. Directly to buyer

VI. TAX ON SALE OF DOMESTIC STOCKS

Through the PSE
 Not subject to capital gains tax
 Subject to a stock transaction tax of 60% of 1% of the selling price
 The old law imposed a rate of 50% of 1% of the selling price

Directly to buyer
 Universal tax – applies to all taxpayers disposing stocks classified as capital assets
 Annual tax – imposed on annual net gain on the sale of domestic stocks directly to
buyer, wherein net gain is determined as follows:
Selling price xx
Less:
Basis of stocks disposed (cost) xx
Selling expenses xx
Documentary stamp tax on the sale xx xx
Net capital gain (loss) xx

Selling price shall mean:

 In case of cash sale, the total consideration received per deed of sale
 In case of partly in money and partly in property, the sum of money and fair value
of property received
 In case of exchanges, the fair value of the property received

Tax basis of stocks disposed

1. If acquired by purchase, use the following methods in descending order of priority:
a. Specific identification
b. Moving average method
c. First in, first out method
2. If acquired for inadequate consideration, use the amount paid by the transferee of
the property
3. If acquired by gift, use the lower of fair market value at time of gift and the basis in
the hands of the donor or the last preceding owner by whom it was not acquired by
gift
4. If acquired by devise, bequest, or inheritance, use the fair value at the time of
death of the decedent

VII. CAPITAL GAINS TAX RATE

Tax Rates
NIRC (old law) Train Law
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
This study source was downloaded by 100000819495833 from CourseHero.com on 09-30-2022 05:44:29 GMT -05:00

https://www.coursehero.com/file/92983222/Chapter-6-Capital-Gains-Taxationdocx/
Chapter 6
Income Taxation – Capital Gains Taxation
_________________________________________________________________________________________________________________
Net gain up to P100,000 5%
15%
Excess net gain above P100,000 10%

Two CGT rates:

1. Foreign corporations – 5% and 10% CGT
2. Individuals and domestic corporations – 15% CGT

VIII. TRANSACTIONAL CAPITAL GAINS TAX

 Required to be reported after each dealing through the capital gains tax return
 BIR Form 1707
 Shall be filed within 30 days after each dealing
 Annual capital gains tax return, BIR Form 1707-A, shall be filed on or before the 15 th
day of the fourth month following the close of the taxable year of the taxpayer

IX. DEALINGS OF REAL PROPERTIES CLASSIFIED AS CAPITAL ASSET LOCATED IN THE

PHILIPPINES
 Subject to 6% of the selling price or the fair value, whichever is higher
 Under the NIRC, the fair value of real property is whichever is higher of the:
A. Zonal value (value prescribed by BIR Commissioner)
B. Fair market value, as shown in the schedule of market values of the Provincial
and City Assessors
 Independent appraisal valuation is not used in computation of capital gains tax
 The 6% CGT applies even if the sale transaction resulted to a loss
 The 6% CGT also applies event when the sale is involuntary
 The CGT shall be withheld by the buyer and remit the same to the government

X. SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

Taxpayers
Location of the property
Individuals Corporations
Within the Philippines All individuals Domestic corporations only
Outside the Philippines Not applicable Not applicable

Exceptions to the 6% capital gains tax

1. Alternative taxation rule
2. Exemption rules
a. Exemption under the NIRC
b. Exemption under special laws

Alternative Taxation
 An individual seller of real property capital assets has the option to be taxed at either:
a. 6% capital gains tax
b. The regular income tax
 It can only be applied if the buyer is the government, its instrumentalities or agencies
including government-owned and controlled corporations

Exemption to the 6% capital gains tax under the NIRC

 Disposition of principal residence for a new principal residence is exempt from 6% CGT
 Principal residence is the primary domicile of the taxpayer
 Requisites of exemption:
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
This study source was downloaded by 100000819495833 from CourseHero.com on 09-30-2022 05:44:29 GMT -05:00

https://www.coursehero.com/file/92983222/Chapter-6-Capital-Gains-Taxationdocx/
 Chapter 6
Income Taxation – Capital Gains Taxation
_________________________________________________________________________________________________________________
1. The seller must be a citizen or a resident alien
2. The sale involves the principal residence of the seller
3. The proceeds will be used for acquisition of new principal residence
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax
exemption within 30 days of sale through a prescribed return (BIR Form 1706)
and “Sworn Declaration of Intent”
5. The reacquisition of new residence must be within 18 months form date of sale
6. The capital gain is held in escrow in favor of the government
7. The exemption can only be availed of once in every 10 years
8. The historical cost of principal residence sold shall carried over to the new
principal residence built or acquired

Exemption to the 6% capital gains tax under special laws

1. Sale of land pursuant to the Comprehensive Agrarian Reform Program
2. Sale of socialized housing units by the National Housing Authority

XI. DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

 On dealings of domestic stocks directly to buyer
 P1.50 for every P200 of the par value of the stocks sold
 On dealings of real properties
 P15 for every P1,000 and fractional parts of the tax basis thereof

XII. PENALTIES FOR LATE FILING OR REMITTANCE OF CAPITAL GAINS TAX

 Same application of penalties mentioned in Chapter 4

XIII. COMPARISON OF THE 6% CGT AND 15% CGT

6% CGT 15% CGT
Tax object Gain on real property Gain on sale of stocks
Basis of the tax Presumed gain Actual gain
Nature of the tax Final tax Self-assessed tax
Frequency of payment Per transaction Transactional and annual tax

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
This study source was downloaded by 100000819495833 from CourseHero.com on 09-30-2022 05:44:29 GMT -05:00

https://www.coursehero.com/file/92983222/Chapter-6-Capital-Gains-Taxationdocx/
Powered by TCPDF (www.tcpdf.org)